European stocks ended lower yesterday, falling for a second day in a row after ECB president Jean-Claude Trichet left the door open to an interest-rate hike in July, but merger activity lifted telecom stocks.
Banks were mixed, with Credit Agricole sinking eight per cent to a five-year low after France's biggest retail bank unveiled a much lower price than expected for the shares offered in its €5.9 billion rights issue.
Royal Bank of Scotland rose 3.8 per cent - boosted by a Citigroup rating upgrade to "buy" - and Swiss lender UBS added 4.2 per cent, as the two banks' rights issues draw to a close. RBS's rights issue ends today, while UBS completes its offering next week.
The FTSEurofirst 300 index of top European shares ended 0.2 per cent lower at 1,309.51 points, the index's lowest close since April 22, although UK stocks rose 0.4 per cent.
"We still don't have much visibility and fears over the health of banks continue to resurface here and there," said Bruno Cavalier, economist at Oddo Securities, in Paris.
"But market sentiment has improved quite a lot over the past two months. We thought we were going to hell at that time. Now it looks more like purgatory, but we're still far away from paradise."
European stocks' losses yesterday were cushioned by easing worries over the health of the US economy after data showed the number of US workers filing new jobless claims fell unexpectedly last week.
The data sparked a rally on Wall Street, where stocks also rose after stronger-than-expected sales figures from Wal-Mart Stores.
The European Central Bank held interest rates at 4.0 per cent, but Mr Trichet said the bank was on high alert over inflation and a number of policymakers supported raising rates.
Mr Trichet said the Governing Council could raise rates as soon as at its next policy meeting on July 3.
"Basically it is turning further towards hawkishness... they are not unanimous and we may expect an interest rate hike in the short term," said Stefan de Schutter, an asset manager at Alpha Trading.
"Even though they are divided at the moment, the ECB is an institution that likes to take decisions on a consensus basis," Oddo's Mr Cavalier said.
"And with the tough economic situation in Spain, Italy and even France at the moment, I don't think ECB members will move ahead with a rise next month. It's a threat aimed at avoiding vicious mechanisms such as second-round inflation."
Around Europe, Germany's DAX index dropped 0.3 per cent, UK's FTSE 100 index rose 0.4 per cent and France's CAC 40 gained 0.2 per cent.
Shares of telecom operators were in the spotlight on renewed mergers and acquisitions activity.
Vodafone rose 3.8 per cent after Verizon Wireless, in which Vodafone holds 45 per cent, said it has agreed to acquire Alltel for $28.1 billion in a deal which Verizon said is expected to bring synergies of more than $19 billion after integration costs.
TeliaSonera jumped 6.5 per cent after France Telecom proposed a $41 billion takeover bid that the Nordic group rejected as too low. France Telecom dropped 5.1 per cent.
Telecom Italia SpA added 4.5 per cent, pushed by France Telecom's planned bid for TeliaSonera and after news the group would cut 5,000 jobs through 2010.
Nokia moved in the opposite direction, falling 3.8 per cent after Goldman Sachs said in a note that the world's top maker of phones could miss consensus earnings in the second quarter and may not supply touch-screen phones in volume before 2009.